Section 4—Modernization


The IRS has experienced great difficulty managing technology. The technology deficiencies are an outgrowth of management and governance problems and the agency’s inability to pursue a long-term strategic vision in its business operations. Absent a strategic vision, no quantity or quality of technological modernization can be truly effective.



Information technology should be used to enable the IRS to achieve its strategic objectives, not to drive them. This premise necessitates a clear strategic plan that identifies business requirements that IRS technologists can use to develop information systems supporting those requirements.

The IRS Tax Systems Modernization (TSM) project failed because the IRS did not have a consistent long-term strategic vision to guide the project. The IRS modernization deficiencies, as documented by GAO and the National Research Council (NRC), show both a lack of business technology integration and a failure to use best practices:


· The IRS did not possess the technical management resources necessary to manage a program as complex as TSM. Senior technical leaders were noticeably absent.
· The systems architecture within the IRS, including its functions, data, and technology building blocks, was insufficient.
· Enterprise wide technical security had not been developed.
· The IRS lacked a cost effective strategy for reducing paper tax return submissions.
· The process for selecting, prioritizing, controlling, and evaluating the progress and performance of major information systems investments was ineffective.
· The IRS failed to develop fully and put in place the requisite management, software development and technical infrastructures necessary to implement successfully an ambitious world class modernization effort.
· The IRS had inconsistent and poorly controlled software development processes.
· Organizational structure with the accountability and authority needed to manage modernization efforts was lacking below the Commissioner's office.


While the recently released Modernization Blueprint demonstrates that the IRS recognizes the need to develop a strategic plan for integrating technology with business objectives, additional steps must be taken to ensure that technology is used to enable business success. Implementation of the Government Performance and Management Act (GPRA), as well as the Information Technology Management Reform Act (ITMRA), should help to ensure that IRS implementation of the Modernization Blueprint is well managed.

The IRS has acknowledged that it lacks the intellectual capability to modernize, and that it must address its lack of personnel with appropriate training and experience. It has begun this process by hiring a promising new chief information officer (CIO) who has begun recruiting senior technical managers from outside the organization. The Commission appreciated the candor of the CIO in describing IRS technology problems, commends him for undertaking the arduous task of developing a comprehensive system and security architecture, and expects that the CIO and his team will effect significant improvements at the IRS.

As the new CIO builds his team to address the IRS technology problems, the IRS must address three significant modernization issues—the century date change, integrating technology with strategic objectives, and developing its intellectual capital. The May 15, 1997 release of the Modernization Blueprint represents a significant IRS accomplishment, and is a major step forward in implementing the Commission’s recommendations on modernization, as well as establishing a partnership with the private sector.


1. The Century Date Change

The IRS must continue to make the century date change its highest technology priority, and Congress should provide the IRS with sufficient resources to address this problem.

The century date change, which relates to the problems most computer systems will have in referring to calendar year 2000, is a high risk area for the IRS. Virtually all computer programs currently use a two digit representation of the year in which the first two digits are implied. For example, 02/12/46 is interpreted as February 12, 1946. When the calendar advances to January 1, 2000, computer programs will interpret the date as January 1, 1900.

The century date change issue has the potential to seriously impact IRS operations after January 1, 2000, and undermine public confidence in the IRS. Some impact may even be experienced before January 1, 2000 because the IRS and external systems may generate invalid dates for future events. The potential risk to voluntary compliance is significant. The IRS has made this problem its highest technology issue, and has developed a plan to correct the problem that is technically sound, but not without basically unavoidable risks.

The risks associated with the century date change are primarily managerial, not technical. The IRS has developed a plan and assigned resources; the challenge is to implement the plan. First, the IRS must complete an inventory of its second and third tier programs. Once that process is complete, the IRS must recode, test, and implement programs in all three tiers. To monitor this process, the IRS should develop detailed schedules with intermediate milestones to be evaluated weekly between now and program completion. As progress is made, the IRS should measure productivity rates so that all future efforts can be scheduled to be accomplished within available resources. In addition, the IRS must develop contingency plans to address the possibility that some milestones will not be met. Finally, because the cost of correcting century date change problems can increase with time, Congress should ensure that the IRS has sufficient resources to address these problems now, while there is still time to accomplish the task, so that the IRS does not have to compete for resources at increased cost as the deadline approaches.

Because the century date change problem carries such high risk, the best IRS technology managers have been placed on the project. This takes them away from other modernization efforts, putting the organization further behind in modernizing its accounts information database. To ensure that the IRS is able to address the century date change problem adequately while continuing its modernization efforts, the Commissioner should ensure that the Board of Directors and Congress are aware of resource requirements so that Congress can provide the IRS with adequate resources.


2. Integration of Technology With Strategic Objectives

The IRS must recognize that technology is an enabler, not a driver, of business success, and that it needs a strategic plan with business objectives that drive the use of technology.

One of the most significant problems with TSM was the failure of the IRS to tie technology objectives directly to business objectives, and to assess success based on those objectives. Integrated technology that meets business objectives should be a principle of management that is demonstrated at the highest levels of the IRS organization.

The IRS needs a strategic business plan that flows down into business requirements and technology needs, using quantitative business indicators to evaluate the benefits of technology toward meeting business objectives. To ensure that information technology systems are developed in a disciplined, yet flexible manner, the IRS must adopt and implement industry best practices, many of which have been legislated for federal agencies in GPRA and ITMRA:


· Establishment of formal strategic business plans and business requirements between business and technology organizations;
· Use of measures to quantify the business benefits of technology investments;
· Conduct of annual strategic planning conferences between business and technology executives;
· Updating and reengineering of business processes so that outdated processes are not thoughtlessly automated;
· Formulation of multi-year budget plans with annual appropriations;
· Development of an overall architecture and design, including a security architecture;
· Consistent application and enforcement of a life cycle methodology; and
· Implementation of changes in technology systems in small, gradual steps, when feasible.


Both GPRA and ITMRA require annual reports to Congress on an agency’s strategic plans. These strategic plans, and measures used to define performance improvements, should be approved by the Board of Directors. To satisfy the GRPA requirement that affected stakeholders be consulted on strategic plans, the IRS should work with additional formal and ad hoc advisory groups.

To be successful in developing and managing technology, a true three-way partnership must be achieved among congressional sponsors, IRS chief officers, and technology developers. Each partner organization should be accountable and responsible within its domain of expertise; congressional sponsors must provide strategic oversight, IRS chief officers must identify strategic plans and operate the business in accordance with those plans, and technology developers must establish national standards for technology and manage systems development in accordance with business requirements. Resources to accomplish each task must be available to the performing organization.


3. Intellectual Capital

The IRS must obtain the intellectual capital necessary to modernize by developing its own core capabilities to manage technology and by acquiring private sector assistance with responsibilities and incentives that focus on achieving IRS success.

The IRS must use a strong leadership team to maximize its core capabilities and private sector resources, including both information technology contractors and tax professionals, for modernization. It must recognize that a richer set of in-house capabilities and skills are required to be effective when there is reliance on external supply, even though fewer personnel may be required.

Upgrading skill levels to manage contractors, however, remains a challenge for the IRS and needs to be acted upon quickly. Ideally, upgrading should occur prior to the award of an outsourced prime contract. If necessary, the IRS should seek assistance in developing this capability. The IRS cannot rely on contractors to correct problems unless it provides the necessary management and oversight. Core capabilities necessary to manage contractors in an outsourced environment are discussed in Appendix F.

If the IRS can establish expertise in managing contractors, using the personnel flexibility recommended in Section 2 of this Report, it can rely on contractors’ expertise in systems development, integration, and implementation. The Commission endorses the IRS plan to use a prime contractor to bring private sector expertise to bear on its modernization program. The scope of the prime contractor’s responsibility should include design and implementation of complete business solutions that satisfy constraints established by the IRS in the Modernization Blueprint. The IRS should establish incentives for the prime contractor that are based on its success in delivering and implementing systems that meet IRS business requirements. For example, contract mechanisms that align contractor interests to those of the IRS, such as performance based contracts, can be instrumental in achieving this objective.